While many of us cherish our homes as more than a piggy bank or a financial investment, the truth is, there are tax advantages to owning a home.
One of those advantages is the tax write-offs that we can use each year.
If you use your home purely as your personal residence, you cannot deduct the cost of home improvements. These costs are nondeductible personal expenses.
However, if you do make home improvements, you can apply those to your home when you sell in order to raise the “basis,” or the amount of investment in your home, that will determine your overall profit that is subject to capital gains tax. (This excludes the cost of improvements that were later removed from the home.)
Another way you can use improvements as tax write-offs is by using a portion of your home as an office. If you qualify for this deduction, you can deduct 100% of the cost of improvements you make to the office space.
If you make an improvement that benefits your entire home, such as a new central air conditioning system, then the percentage of square footage of your office in comparison to your entire home is the percentage of that expense that can be deducted.
This approach also applies if you rent out a portion of your home. Keep in mind that much like the home office deduction, improvements that benefit only the portion of the home being rented can be used as a tax deduction against the rent you collect.
Energy-efficient home improvements, such as solar panels, heating and cooling systems and water heaters often come with a tax credit.
Improvements made for medical reasons are deductible as medical expenses, as long as the cost is reasonable, and the improvements don’t increase the value of the home. Examples include if you install ramps, modify bathrooms, widen doors and hallways, add handrails or install lifts.
For more tax information, review the document Selling Your Home, which is provided by the Internal Revenue Service.